Here the machine cost = P = Rs. 80,000 and since resale value Sn = 0 ; the depreciation (P – S_{n}) = 80000 for all the years and let C_{i} be the operating cost. The Average annual cost A(n) = \(\frac{T}{n}\); Where T = Total cost = (P – S_{n}) + ΣC_{i} and n = no. of years.

Here, Average annual cost A(n) is minimum for n = 5.

∴ The optimum replacement age is 5 years,

i.e., the machines should be replaced at the end of 5 years.

Minimum annual average cost = Rs. 35000